Tuesday, October 12, 2010

BSE Sensex and Nifty 50 charts – an update (Oct 12, ‘10)

BSE Sensex Index Chart

In last week’s update, I had mentioned that the BSE Sensex chart had achieved its upward target of 20600 as measured from the break out point above the year-long consolidation pattern, followed by a pullback to the narrow trading band. But the technical indicators were showing negative divergences – the RSI had made a lower top and the MACD and slow stochastic remained flat while the Sensex touched a new high.

The following observation was made:

‘In case the pullback turns into a correction, the lower edge of the narrow band at 19772 and the rising 20 day EMA should provide support.’

The Sensex has started to trade in a narrow downward-sloping channel, but is yet to reach the level of the rising 20 day EMA (now at 19973). The level of 19772 is just a little below the 20 day EMA. Will either of them support the Sensex fall?

The continued weakness in the technical indicators means that the correction may continue a bit longer. However, the FIIs are still net buyers and any fall in the index seems to be receiving buying support.

That opens up the possibility that the narrow downward channel is actually a consolidation pattern that forms after a sharp up move - known as a ‘flag’. If the Sensex breaks out above the channel within the next few days, it can rise quickly, with an immediate upward target of about 22400.

That was the bullish view. Since the Sensex is in a bull market, it is only natural that the bullish view gets precedence. The lower IIP numbers didn’t affect the index too much, but negative surprises during the upcoming Q2 results season could. If the Sensex falls below 19772, it could fall to 18500.

Nifty 50 Index Chart

The NSE Nifty 50 index chart pattern has a similar downward sloping channel in which the index had been trading for the past 7 sessions, during which it touched a high of 6223 last week.

The MACD is positive but has given a bearish cross below the signal line. Both the RSI and slow stochastic have dropped from their overbought zones and seem headed towards their 50% levels. Volumes have started declining with the index.

If the correction continues and the Nifty 50 falls below the level of 5932 (the lower end of the narrow trading band discussed last week), it can drop to 5550. That is the bearish view.

An upward break out from the downward-sloping channel, which is beginning to look like a consolidation ‘flag’ pattern, has an upward target of 6800. If the ‘flag’ pattern does play out, the upward target can be touched quite soon – even before Diwali.

Just remember that technical analysis is more art than science. The bearish and bullish possibilities have been discussed. Only Mr. Market knows how things will pan out in reality. If you are already in the Diwali gambling mood and ready to place bets on either side, make sure you protect yourself with adequate stop-losses.